Obama and Romney Fiscal Visions Would Fail to Cut U.S. Debt

The two candidates’ budget prescriptions would probably produce the same result. That’s because neither would probably stop borrowing money to pay for what he wants to do.Photographer: Andrew Harrer/Bloomberg

Aug. 24 (Bloomberg) -- “Stick with the president’s path,”
said Representative Paul Ryan at a fundraiser in Tampa, Florida,
on Aug. 18, “and we will be a country in debt and in decline.”

It’s a familiar theme for Ryan, repeated on the campaign
trail and in the two Path to Prosperity budget proposals he has
written as chairman of the U.S. House Budget Committee.

Ever since Mitt Romney chose the Wisconsin congressman as
his running mate, the central arguments in this year’s
presidential race have become clear. The election presents
voters with a stark choice between two different visions of
government: one that is active, President Barack Obama’s, and
one that gets out of the way, Romney’s, Bloomberg Businessweek
reports in its Aug., 27 issue.

Yet the two candidates’ budget prescriptions would probably
produce the same result. That’s because neither would probably
stop borrowing money to pay for what he wants to do.

The president offers a detailed budget plan that would be
difficult to pass in Congress -- and doesn’t really attempt to
unwind the spending. The Republican ticket’s budget proposals
lack details, probably can’t pass in Congress, and are unclear
how they would reduce spending.

Under both, the government would continue to amass debt to
fund what each side says the economy needs: tax cuts, in the
Republican view, or investment, as Democrats advocate. In that
way, America’s choice is between two different versions of large
government.

Budget Experiment

For the past decade, the U.S. has been running an
experiment in how much money the government can borrow to push
into the economy. In 2002, after a one-year dip into the black,
the U.S. began running deficits again.

The Bush tax cuts, extended by the Obama administration,
have been blamed for causing these deficits, along with the wars
in Iraq and Afghanistan, and Medicare Part D, and reduced
revenue from the dot-com bust, and the Great Recession, and
Barack Obama’s 2009 stimulus. Once in deficit, if the
federal government takes in less money, it makes up the
difference by borrowing. If it writes bigger checks, it does the
same. Until the budget is balanced, it’s all Treasury bills.
It’s all spending.

Less Revenue

In Obama’s budget this year, he takes credit for offering a
comprehensive spending-reduction deal to congressional
Republicans in 2011. And yet according to the Congressional
Budget Office, the White House’s proposed 2013 budget increases
debt as a proportion of gross domestic product until 2018, when
it flattens out at around 76 percent.

If Obama were willing to raise taxes as much as Republicans
claim he intends to, the president would be able to make up some
of that shortfall. Yet over the next 10 years, his budget would
take in 6 percent less in revenue than under current law.

Obama’s betting that the economy needs investment --
spending -- now, and that it can tolerate debt at 76 percent of
GDP, almost 30 percent higher than in 2008, before the economy
crashed. His plan doesn’t reduce the debt. It’s a calculation of
what he thinks voters can tolerate.

As for the Republicans, it’s still unclear whether their
campaign will adopt Ryan’s 2013 Path to Prosperity budget
resolution or Romney’s set of campaign ideas. Both say they can
reduce corporate and personal taxes and avoid losing revenue by
eliminating deductions and loopholes.

Simpson-Bowles

On the surface, this sounds a lot like the recommendations
made by the bipartisan Simpson-Bowles commission on deficit
reduction. Yet where the Simpson-Bowles report detailed which
loopholes should go, neither Ryan nor Romney will commit to any
-- save Ryan’s plan to eliminate deductions for alternative-energy companies.

As the Congressional Research Service says, deductions
“are broadly used by the public and quite popular,” which
means politicians will be reluctant to get rid of them.

Unlike the Simpson-Bowles panel, neither Romney nor Obama
anticipates any changes to Social Security. Ryan’s budget does
come up with real, detailed savings by reducing overall Medicare
costs and turning the program into a system of premium
subsidies.

It also reduces the cost to the federal government of
Medicaid, turning it into block grants for the states. It
reduces fixed payments to farmers. The Path to Prosperity
promises some honesty in budgeting, such as bringing federal
loan guarantees onto the books as a liability.

Doing Nothing

What it doesn’t do is bring down the national debt. The
Path to Prosperity for the 2012 budget year included numbers for
each federal agency by year. The CBO examined the estimates,
agency by agency, and concluded that Ryan’s plan would raise
public debt to 70 percent of GDP by 2022 -- a little worse than
if Congress were to do nothing.

For the 2013 budget year, Ryan’s new Path to Prosperity
claims to bring the debt down to just 61 percent of GDP by 2022.
He did this by getting rid of pages of details, replacing them
with a single line of grand totals for government outlays and
revenue. And this time, Ryan didn’t ask the CBO for a score.

Instead, he requested what’s called a “long-term
outlook.” He gave the CBO his budget totals for each year until
2022 without any details of how he came up with them. The budget
office then used them to project the debt from 2022 to 2050.

Unpopular Plan

Ryan’s ideas on Medicare and Medicaid, which would save
real money, are highly unpopular and have passed only in the
Republican-led House. And they may have passed there only
because representatives knew the legislation had no chance of
passing in the Senate.

The rest of his plan -- and Romney’s -- assumes that
Congress will make cuts because Congress will force itself to
make cuts. Taxes will be lower and revenue won’t fall too much,
yet it doesn’t say how.

There’s no mystery in Washington or anywhere else about
what needs to be done to bring government spending under
control.

One option is to do nothing. In its long-term budget
outlook for 2012, the CBO presents a future it calls the
“baseline scenario.” This is simply what would happen if
Congress passed no new spending bills before January.

The Bush tax cuts would expire. Automatic cuts to defense,
Medicare, and discretionary spending would go into effect.
According to the CBO, the baseline starts reducing debt as a
percentage of GDP in 2016; by 2022 debt would decline to
61 percent, the same target the Ryan plan aims for.

Fiscal Cliff

There’s a reason the baseline scenario is often referred to
as the “fiscal cliff”: Ending the Bush tax cuts and allowing
the automatic spending cuts to take effect would limit growth in
real GDP next year to half a percent.

This abrupt timeline would be destructive to the economy
and terrible for jobs. So both parties are now negotiating under
the shared assumption that neither can tolerate it. Yet whether
we make them soon or make them later, cuts of this size will
eventually be necessary.

Under what the CBO calls the “alternative fiscal
scenario,” the parties in Congress pass a set of laws that
allows them to avoid the cliff and keep on spending. This is
what they are now attempting to do; the alternative scenario
would put the debt at 94 percent of GDP by 2022. Greece is at
160 percent. U.S. debt continues to draw buyers at cheap rates,
though that won’t last forever.

Simpson-Bowles

There’s another route to debt reduction that wouldn’t take
the economy over a cliff. The Simpson-Bowles plan lands gently,
while still reducing debt to 61 percent of GDP by 2023. It has
the advantage of not coming from the White House, Romney’s
headquarters, or Ryan’s office. It was negotiated by Democrats
and Republicans and, conceivably, should stand a chance of
passing Congress and being signed by the next president.

Yet Obama, who called the commission into existence,
stepped away from its recommendations. And Ryan, who sat on the
panel, refused to endorse its report, helping to prevent it from
being sent to Congress.

As for Romney, he claims his proposals are similar to the
commission’s, though his plans don’t contain as much detail.

In his 2013 budget, Obama points to the “Paygo” bill he
signed into law, which requires revenue increases to offset the
cost of any new programs and cuts to accompany any revenue
losses. Ryan’s Path to Prosperity proposes “Cutgo,” which
would force any new mandatory programs to be accompanied by
discretionary cuts elsewhere in the budget. Neither one spells
out how to pay or cut.

No matter what the candidates say, the 2012 campaign
doesn’t pit two radically different ideas about the size of
government against each other. Obama and Romney are arguing
about different visions of how to borrow money, shift it around,
and not pay it back.